Class Microeconomics Notes 10/8/07
E. Demand is Downward Sloping 1. 2 Effects of a change in Price a. Income effect b. Substitution effect CHAPTER 6 COMPETITIVE MARKET: We are talking about the demand of the firm, not the market demand. The firm's demand is perfectly elastic because they cannot set their own prices. II. Firm Profit and Production A.) Assumption: Goal of all firms is to maximize profit subject to their production function. We are trying to max utility subject to B.C for consumers We are trying to max profit subject to production constraints B.) Profit: Profit is abbreviated as "" The Definition: difference between total revenue and total costs o Profit = Total Revenue (Total Costs) Total Revenue = (P * Q) and is abbreviated as TR = (P * Q) Total Cost (abbrev. TC) The amount of money the firm has to incur in order to produce a product. Ranges of Profit Can be positive ( > 0, TR > TC), earnings Can be 0 (Break even) ( = 0; TR = TC), breakeven [includes O.C and cash outlay costs] Can be negative ( < 0; TR < TC), losses C. Total Costs TC = Explicit costs + implicit costs o Explicit costs Cash Outlay (actual money/economic cost) o Implicit costs Opportunity Costs I.